KYPH Kyphon (MM)

Revenues Increase 43% from Q206 to $144.3 Million SUNNYVALE, Calif., July 27 /PRNewswire-FirstCall/ -- Kyphon Inc. (NASDAQ:KYPH) today announced financial and operating results for the second quarter ended June 30, 2007 as follows: Financial Results Kyphon's worldwide revenues for the second quarter of 2007 totaled $144.3 million, an increase of 43%, or 41% at constant foreign currency exchange rates, over the $101.1 million in net sales reported for the second quarter of 2006. Total U.S. revenues for the quarter increased 36% to $110.7 million over the same period in 2006, while total international revenues increased 73% to $33.6 million. Kyphon's core spinal fracture management and repair product revenue grew 19% to $120.6 million over the same quarter of 2006, with U.S. revenues growing 13% to $92.2 million and international revenues growing 46% to $28.4 million. Revenues from Kyphon's spinal motion preservation and disc disease diagnosis and therapies products, which include the X-STOP(R) IPD(R), Aperius(TM) Percutaneous Lumbar Interspinous Decompression (PercLID(TM)), and Discyphor(TM) Functional Anaesthetic Discography(TM) (F.A.D.(TM)) technologies, were $23.7 million, with U.S. revenues of $18.4 million and international revenues of $5.3 million. Total revenues for the second quarter of 2007 included sales of $22.7 million of the X-STOP(R) IPD(R) products from our acquisition of St. Francis Medical Technologies, Inc. (SFMT) in January 2007. For the second quarter of 2007, reported GAAP net income was $11.0 million, or $0.23 per diluted share compared to net income of $9.5 million, or $0.21 per diluted share, for the same period a year ago. Non-GAAP diluted earnings per share for the second quarter was $0.26 compared to $0.21 per diluted share in the same quarter a year ago. The non- GAAP diluted earnings per share of $0.26 excludes the following impacts from the SFMT acquisition that closed in January 2007: (1) $0.01 per share for purchase accounting adjustments related to inventory valuation, and (2) $0.02 per share for severance and other transitional compensation expense. A reconciliation of GAAP and non-GAAP operating results is presented below. "We are very pleased with our performance during the second quarter, as increased procedural penetration delivered strong revenue growth for Kyphon," said Richard Mott, president and chief executive officer of Kyphon. "Our results continue to reflect strong clinician adoption and the value to patients of balloon kyphoplasty and the X-STOP(R) IPD(R) procedure. Additionally, we made solid progress on key initiatives designed to fuel future growth including the introduction of new marketing programs to supplement expansion of our global sales channel, training of new spine specialists in performing balloon kyphoplasty and the X-STOP(R) IPD(R) procedure, and increased enrollments for our clinical trial programs," continued Mott. "We believe our focused efforts to bring innovative minimally invasive based technologies to physicians and patients around the world are creating a foundation for continued long-term growth," concluded Mott. For the first six months of 2007, Kyphon's worldwide revenues totaled $272.5 million, an increase of 42%, or 39% at constant foreign currency exchange rates, over the $192.5 million in net sales reported for the same period in 2006. Total U.S. revenues increased 35% to $211.8 million for the first half of the year, while total international revenues increased 72% to $60.7 million. Kyphon's core spinal fracture management and repair product revenue grew 20% during the first half of 2007 to $230.3 million over the same period in 2006. U.S. revenues grew 14% to $179.0 million while international revenues grew 45% to $51.3 million. Revenues from Kyphon's spinal motion preservation and disc disease diagnosis and therapies products were $42.2 million, with U.S. revenues of $32.7 and international revenues of $9.5 million. Total revenues for the first six months of 2007 included sales of $40.8 million of the X-STOP(R) IPD(R) products from our acquisition of SFMT in January 2007. For the first six months of 2007, reported net loss on a GAAP basis was $11.6 million, or $0.26 per share compared to GAAP net income of $18.0 million, or $0.39 per diluted share, for the same period a year ago. Non-GAAP diluted earnings per share for the first six months of 2007 was $0.46, compared to $0.39 per diluted share for the same period a year ago. The non-GAAP diluted earnings per share of $0.46 excludes the following impacts from the SFMT acquisition: (1) $0.45 per share for in-process research & development (IPR&D) charges; (2) $0.10 per share for write-off of bank loan fees associated with the acquisition; (3) $0.06 per share for purchase accounting adjustments related to inventory valuation; (4) $0.04 per share for costs related to the transition of SFMT sales agent activities to Kyphon's direct sales force in the U.S.; and (5) $0.07 per share for severance and other transitional compensation expense. A reconciliation of GAAP and non-GAAP operating results is presented below. Business Highlights During the second quarter of 2007: -- Kyphon reported that a record number of balloon kyphoplasty procedures were performed in the U.S., increasing the hospital activity rate to a record 3.8 procedures per active hospital account per month. -- Kyphon reported that the first balloon kyphoplasty cases were completed in India, Malaysia and Hong Kong, enhancing the company's global presence with revenues derived from approximately 45 countries. -- Kyphon reported that approximately 540 spine surgeons were trained to perform the X-STOP(R) IPD(R) procedure in the U.S. during the quarter, bringing the total number of spine surgeons trained to perform the X- STOP(R) IPD(R) procedure in 2007 to 930. Additionally, the number of active X-STOP(R) hospital accounts in the U.S. grew 49% in the second quarter to 620 compared to the first quarter of 2007. -- Kyphon confirmed Medicare physician reimbursement for the X-STOP(R) IPD(R) procedure has been established in all 50 states. Additionally, in April the Centers for Medicare & Medicaid Services (CMS) published the proposed rule for inpatient DRG payment rates for fiscal 2008. CMS proposed moving the X-STOP(R) IPD(R) procedure into a new, higher paying DRG and discontinuing the new technology add-on payment. The proposed payment represents an increase ranging from 20-81% depending on hospital specific factors over the existing payment currently associated with the X-STOP(R) IPD(R) procedure. -- In July, CMS published the proposed 2008 Hospital Outpatient Prospective Payment System (HOPPS) rule. With regard to balloon kyphoplasty, the 2008 proposed payment represents an increase of approximately 18% over the total existing payment currently in effect. With regard to the X-STOP(R) IPD(R) procedure, the proposed 2008 outpatient setting payment represents an increase of approximately 21% over the existing payment currently in effect. Additionally, the pass- through payment for the X-STOP(R) IPD(R) device was proposed to be extended through 2008. Finally, balloon kyphoplasty is to be added to the Medicare list of approved Ambulatory Surgery Center (ASC) procedures effective January 1, 2008. Use of Non-GAAP Financial Measures Kyphon management believes that investors may wish to consider the impact of certain charges to better understand short- and long-term financial trends in the company's operations and financial performance. These charges result from facts and circumstances that vary in frequency and/or impact on continuing operations. In addition, Kyphon management uses results of operations before certain charges to evaluate the operational performance of the company and as a basis for strategic planning. Investors should consider these non-GAAP measures in addition to, and not as a substitute for, financial performance measures in accordance with GAAP. Reconciliation of GAAP and Non-GAAP Operating Results Non-GAAP results for the three and six-month periods ended June 30, 2007 exclude certain expenses related to the acquisition of SFMT. This non-GAAP presentation is given in part to enhance the understanding of the company's historical financial performance and comparability between periods. In addition, the company believes that the non-GAAP presentation to exclude certain charges is relevant and useful information that will be widely used by analysts, investors, and other interested parties in the medical device industry. Accordingly, the company is disclosing this information to permit additional analysis of the company's performance. A reconciliation of Kyphon's non-GAAP operating results to its GAAP operating results for the three and six month periods ended June 30, 2007 follows (unaudited, in thousands, except per share amounts): Kyphon Inc. Reconciliation of GAAP and Non-GAAP Operating Results (unaudited; in thousands, except per share amounts) Three Months Ended Three Months Ended June 30, 2007 June 30, 2006 ----------------------------------- -------------- GAAP Adjustments Non-GAAP GAAP -------------------------- -------- -------------- U.S. net sales $110,676 $- $110,676 $81,641 International net sales 33,655 - 33,655 19,421 -------------------------- -------- -------------- Net sales 144,331 - 144,331 101,062 Operating costs and expenses: Cost of goods sold 19,493 (933)(3) 18,560 12,913 Research and development 13,484 (733)(5) 12,751 9,931 Sales and marketing 63,780 (260)(4)(5) 63,520 48,649 General and administrative 20,026 (356)(5) 19,670 14,496 Amortization of acquired intangible assets 5,404 - 5,404 283 Total operating costs and expenses 122,187 (2,282) 119,905 86,272 -------------------------- -------- -------------- Income from operations 22,144 2,282 24,426 14,790 Interest expense (3,046) - (3,046) - Interest income and other, net 1,088 - 1,088 2,080 -------------------------- -------- -------------- Income before income taxes 20,186 2,282 22,468 16,870 Provision for income taxes 9,210 801 10,011 7,390 -------------------------- -------- -------------- Net income $10,976 $1,481 $12,457 $9,480 -------------------------- -------- -------------- Net income per share Basic $0.24 $0.03 $0.27 $0.21 -------------------------- -------- -------------- Diluted $0.23 $0.03 $0.26 $0.21 -------------------------- -------- -------------- -------------------------- -------- -------------- Weighted-average shares outstanding: Basic 45,599 45,599 44,327 -------- -------- -------------- Diluted 47,818 47,818 46,221 -------- -------- -------------- Kyphon Inc. Reconciliation of GAAP and Non-GAAP Operating Results (unaudited; in thousands, except per share amounts) Six Months Ended Six Months Ended June 30, 2007 June 30, 2006 ----------------------------------- -------------- GAAP Adjustments Non-GAAP GAAP -------------------------- -------- -------------- U.S. net sales $211,783 $- $211,783 $157,153 International net sales 60,685 - 60,685 35,337 -------------------------- -------- -------------- Net sales 272,468 - 272,468 192,490 Operating costs and expenses Cost of goods sold 38,996 (5,191)(3) 33,805 23,878 Research and development 25,264 (1,348)(5) 23,916 18,237 Sales and marketing 127,496 (4,099)(4)(5) 123,397 94,035 General and administrative 39,957 (2,754)(5) 37,203 28,064 Amortization of acquired intangible assets 9,819 - 9,819 566 In-process research and development 21,300 (21,300)(1) - - -------------------------- -------- -------------- Total operating costs and expenses 262,832 (34,692) 228,140 164,780 -------------------------- -------- -------------- Income from operations 9,636 34,692 44,328 27,710 Interest expense (15,449) 8,061(2) (7,388) - Interest income and other, net 2,123 - 2,123 4,203 -------------------------- -------- -------------- Income (loss) before income taxes (3,690) 42,753 39,063 31,913 Provision for income taxes 7,930 9,367 17,297 13,940 -------------------------- -------- -------------- Net income (loss) $(11,620) $33,386 $21,766 $17,973 -------------------------- -------- -------------- Net income (loss) per share: Basic $(0.26) $0.73 $0.48 $0.41 -------------------------- -------- -------------- Diluted $(0.26) $0.72 $0.46 $0.39 -------------------------- -------- -------------- Weighted-average shares outstanding: Basic 45,426 45,426 44,181 -------- -------- -------------- Diluted 45,426 47,582 46,091 --------- -------- -------------- (1) In-process research and development (IPR&D) charges related to SFMT acquisition. (2) The write-off of loan fees related to the temporary bank financing used to close the SFMT transaction. (3) Purchase accounting adjustments related to inventory valuation for SFMT. (4) Costs related to the transition of SFMT agents to Kyphon's direct sales force in the U.S. (5) Severance and other transitional compensation expense related to the SFMT acquisition. Kyphon's operating results on both a GAAP and non-GAAP basis include stock-based compensation expenses of $6.8 million and $6.9 million for the three-month periods ended June 30, 2007 and 2006, respectively, and $13.4 million and $13.3 million for the six-month periods ended June 30, 2007 and 2006, respectively. Earnings Call Information Due to Kyphon's announcement earlier today of its execution of a definitive agreement to be acquired by Medtronic, no conference call will be held to discuss these results. About Kyphon Inc. Kyphon develops and markets medical devices designed to restore and preserve spinal function and diagnose the source of low back pain using minimally invasive technologies. The company's products are used in balloon kyphoplasty for the treatment of spinal compression fractures caused by osteoporosis or cancer, in the Functional Anaesthetic Discography(TM) (F.A.D.(TM)) procedure for diagnosing the source of low back pain, and in the Interspinous Process Decompression (IPD(R)) procedure for treating the symptoms of lumbar spinal stenosis. More information about the company and its products can be found at http://www.kyphon.com/ and its patient education Web site, http://www.spinalfracture.com/. Kyphon, KyphX, X-STOP and IPD are registered trademarks, and Aperius, PercLID, Discyphor, Functional Anaesthetic Discography and F.A.D. are trademarks, of Kyphon Inc. This press release contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward looking statements include, but are not limited to, those that use words such as "believes," "anticipates," "targets," "intends," "plans," "may," and words of similar effect, and specifically include the company's anticipated business direction and performance. Forward-looking statements are based on management's current preliminary expectations without taking into account any possible impact from the announced transaction with Medtronic or any other future strategic transaction and are subject to risks, uncertainties and assumptions, which may cause the company's actual results to differ materially from the statements contained herein. Information on potential risk factors that could affect Kyphon, its business and its financial results are detailed in the company's periodic filings with the Securities and Exchange Commission (SEC), including, but not limited to, those risks and uncertainties listed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors Affecting Future Operating Results," which can be found in Kyphon's annual report on Form 10-K for the year ended December 31, 2006 filed with the SEC on February 28, 2007 and on Form 10-Q for the quarter ended March 31, 2007 filed with the SEC on May 10, 2007. Kyphon undertakes no obligation to release publicly any revisions to any forward-looking statements contained herein to reflect events or circumstances after the date hereof. KYPHE KYPHON INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited; in thousands, except per share amounts) Three Months Ended Six Months Ended June 30, June 30, --------------- ---------------- 2007 2006 2007 2006 ---- ---- ---- ---- U.S. net sales $110,676 $81,641 $211,783 $157,153 International net sales 33,655 19,421 60,685 35,337 -------- -------- -------- -------- Net sales 144,331 101,062 272,468 192,490 -------- -------- -------- -------- Operating costs and expenses: Cost of goods sold 19,493 12,913 38,996 23,878 Research and development 13,484 9,931 25,264 18,237 Sales and marketing 63,780 48,649 127,496 94,035 General and administrative 20,026 14,496 39,957 28,064 Amortization of acquired intangible assets 5,404 283 9,819 566 In-process research and development - - 21,300 - -------- -------- -------- -------- Total operating costs and expenses 122,187 86,272 262,832 164,780 -------- -------- -------- -------- Income from operations 22,144 14,790 9,636 27,710 Interest expense (3,046) - (15,449) - Interest income and other, net 1,088 2,080 2,123 4,203 -------- -------- -------- -------- Income (loss) before income taxes 20,186 16,870 (3,690) 31,913 Provision for income taxes 9,210 7,390 7,930 13,940 -------- -------- -------- -------- Net income (loss) $10,976 $9,480 $(11,620) $17,973 -------- -------- -------- -------- Net income (loss) per share: Basic $0.24 $0.21 $(0.26) $0.41 -------- -------- -------- -------- Diluted $0.23 $0.21 $(0.26) $0.39 -------- -------- -------- -------- Weighted-average shares outstanding: Basic 45,599 44,327 45,426 44,181 -------- -------- -------- -------- Diluted 47,818 46,221 45,426 46,091 -------- -------- -------- -------- KYPHON INC. CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited; in thousands) June 30, December 31, 2007 2006 ---------- ---------- Assets Current assets: Cash and cash equivalents $51,868 $81,939 Investments - 120,214 Accounts receivable, net 97,157 73,859 Inventories 18,603 11,869 Prepaid expenses and other current assets 9,802 7,520 Deferred tax assets 15,985 6,072 ---------- ---------- Total current assets 193,415 301,473 Property and equipment, net 37,179 27,590 Goodwill 357,944 4,802 Other intangible assets, net 205,042 9,940 Deferred tax assets - 14,955 Other assets 114,055 69,846 ---------- ---------- Total assets $907,635 $428,606 ---------- ---------- Liabilities and Stockholders' Equity Current liabilities: Accounts payable $14,073 $10,447 Accrued liabilities 76,716 62,980 ---------- ---------- Total current liabilities 90,789 73,427 ---------- ---------- Deferred rent and other 16,991 10,479 Borrowings 401,275 - Deferred tax liabilities 62,449 - ---------- ---------- Total liabilities 571,504 83,906 ---------- ---------- Commitments and contingencies Stockholders' equity: Common stock, $0.001 par value per share 46 45 Additional paid-in capital 287,481 284,672 Treasury stock, at cost (201) (201) Accumulated other comprehensive income 2,408 1,607 Retained earnings 46,397 58,577 ---------- ---------- Total stockholders' equity 336,131 344,700 ---------- ---------- Total liabilities and stockholders' equity $907,635 $428,606 ---------- ---------- DATASOURCE: Kyphon Inc. CONTACT: Julie D. Tracy, Vice President, Chief Communications Officer, +1-408-548-6687 Web site: http://www.kyphon.com/

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